The inability to purchase VCT shares in the primary market via a platform has provided a longstanding headache for advisers. However, things are looking up, and shares in VCTs can now be bought by a nominee whilst still qualifying for tax relief.
- This is likely to prompt further investment and development, which should provide longer-term support for the evolution of the VCT industry
- VCT providers and platforms need to work together to manage their pipelines in order to ensure that offers are not oversubscribed
- Advisers need to consider the issue of suitability, and also how they intend to compete in an expanding area of the market
Investment platforms now boast an estimated £350bn in assets under administration while some four-fifths of new retail investments are now made via a platform. Today, almost all advisers use at least one platform and, in surveys, both advisers and consumers cite the functionality, ease of use and ability to build a consolidated picture of their total portfolio as key benefits of this approach.
To date, however, it has not been practical to hold venture capital trusts (VCTs) on platforms. It is possible to transact in VCTs in the secondary market via a platform, or to purchase a VCT off-platform and then transfer it onto a platform, but it has not been possible to purchase VCT shares in the primary market – which of course is what most VCT investors want to do in order to obtain the upfront tax relief. This is major headache for advisers and resolving this issue would remove a significant source of friction in the investment process and pave the way for increased inflows.
The situation has begun to change. Changes announced in the 2014 Finance Bill allowed shares in VCTs to be bought by a nominee and still qualify for the tax reliefs. Nominee ownership is a key requirement in enabling financial advisers to manage their clients’ investments on platforms and, in April 2015, Octopus announced it had completed a development with Transact to enable shares in its VCTs to be bought and held on the platform.
This was a relatively big project for Transact and Octopus, but it may be that, now they have undertaken much of the heavy lifting, it will be easier for other platforms and providers to follow suit. Intelligent Partnership held a round-table discussion between Transact, Octopus and small group of VCT providers in September 2015 to discuss the issue. Transact was of course keen to bring more providers on board as, perhaps counter-intuitively, were Octopus – they both want to see this become a genuine route to market for VCTs.
The other VCT providers were also very keen to get onto platforms, recognising the benefits that being able to transact in this way would bring. As Brendan Llewellyn of Adviser Home put it in a short presentation on the topic, when it comes to winning over new advisers “business process empathy is crucial”.
The providers see acceptance on a platform as not only a way to make life easier for existing adviser clients, but also as an opportunity to engage new ones. If the market grew, the platforms would presumably invest in developments such as publishing net asset values as well as share prices and reminders that five year minimum holding periods are coming to an end. It is easy to see how this could be a positive evolution for the VCT industry.
"...we are confident that, as more platforms and VCT providers work together, any friction in the onboarding process will be minimised and it will be easy enough for the small guys to follow suit."
There are some logistics to iron out as well. Providers and platforms need to work closely together to manage their pipelines to ensure that offers are not oversubscribed (an issue for all closed funds on platforms); the distribution lists for ongoing communications to investors will be impacted now the central share register cannot be relied upon; the process for selling shares in the secondary market has to be closely monitored to ensure investors are obtaining the best possible price; and Dividend Reinvestment Schemes are harder to administer. These are all issues that should be overcome as we see more take-up on VCTs on platforms.
Inertia must be overcome
Often the process will hinge upon the interactions between the platform, receiving agents and registrars, rather than between the platform and the VCT provider. With little commercial interest in this development, there may be some inertia on their part that also needs to be overcome.
Perhaps the biggest potential stumbling block, however, is the time and effort involved. As the market leader, Octopus can afford to put resource into these projects – and kudos to the company for doing what a market-leader should do and leading the way. Many other VCT providers do not have big teams with the spare capacity to attack these projects in the same way although, of course, some of the other big VCTs are distracted by the recent rule changes as well.
Nevertheless, we are confident that, as more platforms and VCT providers work together, any friction in the onboarding process will be minimised and it will be easy enough for the small guys to follow suit. We think there could be a handful on Transact in the 2015/16 tax year and a lot more VCTs across a couple of the most flexible platforms – not the old fund supermarkets – the following season.
Now, most of these issues are for the industry to work out. From advisers’ point of view, however, they simply want the convenience of being able to access VCTs in the same way as the majority of other retail investment products – although there are two deeper issues advisers would do well to bear in mind.
The first is the issue of suitability. This was a fear expressed by some providers – and some advisers we spoke with. They see platforms as a mass-market tool and VCTs as a niche-market product and therefore feel uncomfortable with VCTs listing on platforms. Ultimately of course, suitability is something that will sit with the adviser and not the platform or provider – so it must be hoped that, if VCTs do become commonplace on platforms, it does not lead to complacency or mis-perceptions about what these products are on the part of some advisers.
There will also be a responsibility on providers to market themselves honestly although, with a new audience of advisers – and potential investors – to try and reach, some of the providers may well be tempted to position their product as close to mass-market as they dare.
This brings us onto the second consideration – if platform acceptance does potentially open up a new cohort of advisers to market to, the providers with the biggest marketing budgets will be the most successful. They will bring in more customers, but one hopes this is not at the expense of the smaller VCTs who have some of the most interesting – and best-performing – offers. Advisers who are coming to VCTs for the first time should keep this in mind when they are being bombarded with marketing messages in the near future.
